This Silver Miner Is Undervalued

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Just like any other silver miner, Hecla Mining (NYSE: HL  ) is out of investors' favor this year. The company has lost 48% of capitalization from the beginning of 2013. The stock is trading at just 70% of Hecla's book value, but investors seem to focus on falling silver prices. In my opinion, Hecla is being overly punished.

Quebec mining tax turned down
Hecla has three operating mines: Greens Creek in Alaska, Lucky Friday in Idaho, and the freshly acquired Casa Berardi in Quebec. The proposed bill would have increased royalties that mining companies have to pay by 15%. This would not have been a death blow, but in the current environment miners need every penny.

The Mexican government was not that generous. Country's Senate has recently approved a new 7.5% tax on mining companies' earnings before interest, taxes, depreciation and amortization. The tax also includes an additional 0.5% charge on sales of gold, silver and platinum.

This tax affects Hecla's San Sebastian project in Mexico, which is in a pre-development stage. San Sebastian is the most advanced project that Hecla has. The company states that it is going to weigh the impact of this additional tax, but currently it has not come to any conclusion.

The effect of Mexican tax is more pronounced for companies like Silver Standard Resources (NASDAQ: SSRI  ) and Gold Resource (NYSEMKT: GORO  ) . Silver Standard has just one operating mine, and the company's future is vastly dependent upon the success of its Pitarilla project in Mexico. Silver Standard states that it has initiated a review of the mine plan. The company no longer anticipates making a construction decision by the end of the year.

All of Gold Resource's operations are situated in Mexico. No wonder the stock has lost 63% of its value this year. Gold Resource yields a hefty 6.53%, but income investors should be aware that company's business has just received a significant blow.

Lucky Friday back on track
Hecla has only three producing mines, and each mine is crucial. Lucky Friday produced 479,188 ounces of silver in the third quarter. Hecla expects that the mine, which was shut in 2012 and has been increasing production since then, would reach its normal production rates and deliver 784,000 ounces of silver in the fourth quarter.

Hecla is known as a silver producer, but in fact it is a diversified mining company. Silver accounts for 38% of Hecla's revenue, while 35% of revenue comes from gold, 16% from zinc, and 11% from lead. Zinc and lead prices did not experience the same drop that happened with gold and silver prices. In comparison with the third quarter of 2012, lead prices rose by 7%.

Such diversification in combination with operating efficiency helps Hecla to deal with difficult times. The company lost $8.6 million in the third quarter. Hecla had $238 million of cash on its balance sheet at the end of the third quarter, so it has plenty of liquidity to deal with the challenging environment. What's more, Hecla can make an acquisition similar to its purchase of the Aurizon Mines when some cash-stripped producer will be in need of money.

Bottom line
If you look at Hecla's stock performance during the last few months, you might think that the company is in trouble. The stock is down 25% since the high reached back in August. However, it's not the case.

Hecla is not making money right now, but it will be when silver and gold prices tick up a little. The company is growing its production through operating existing mines and through acquisitions. It has more than enough liquidity to weather the storm. All in all, Hecla is a very interesting long-term bet.

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9/27/2016 4:00 PM
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